If you’re solely focused on creating money, you’ll never make it as a stock investor or trader.
Unfortunately, when it comes to investing, most rookie investors only think about the profiting side of things. They get caught up with the hype of other people’s success stories.
This comes as no surprise – with the large volume of online videos and ads these days of “self-made millionaires” who supposedly “made it big” and transformed their lives overnight or within a short period of time through stock investing and trading. These people are often easy to spot – showing off their lavish lifestyles filled with all the luxuries life has to offer, such as fancy Lamborghinis, big mansions and private jets (a phenomenon I jokingly refer to as “financial porn“)
As a result, rookie investors who fall for the allure and promise of “get-rich-quick,” overnight financial freedom can end up learning and implementing some very risky stock investing strategies that generally involve some form of margin lending or leverage (i.e. borrowing money to invest).
Even Conservative Stock Investors Fall Into This Mental Trap
What about more “conservative” stock investors? The ones who are more conscious of financial porn and doubtful of risky get-rich-quick strategies?
From my experience they’re just as susceptible to placing too much emphasis on profit, rather than preserving their capital – and this is evident with all the rookie investors who profited from the 2020 bull market.
True Stock Investors and Traders Focus On Loss Prevention
Stocks are one of the most risky types of investments (if you don’t know what you’re doing).
A stock can go up or down in value very quickly, and if you’re not careful, you can lose a lot of money. That’s why true stock investors and traders focus on loss prevention first and foremost. They know that if they can protect their capital, the profits will take care of themselves.
It’s a very different mindset from that of gamblers who are only focused on making money. For them, it’s all about the thrill of the win and the high of making money. They’re not thinking about how to preserve their capital or minimize their losses.
The bottom line is this: if you want to be a successful stock investor or trader, you need to focus on loss prevention first and foremost. Profits should be a by-product of good risk management, rather than your sole focus.
How Can We Prevent Losses when Investing or Trading Stocks?
So what are some things you can do to prevent losses when investing or trading stocks?
Generally speaking, there are three key ways to prevent losses in the stock market:
Diversify Your Portfolio
Don’t put all your eggs in one basket.
When you diversify your portfolio, you’re spreading out your risk over different stocks and asset classes. This way, if one stock takes a hit, it’s not going to have as big of an impact on your overall portfolio value.
You want to make sure you’re diversifying properly though – as many rookie investors make this mistake and end up ‘di-worse-ifying’ their portfolios.
Use Stop-Loss Orders
A stop-loss order is an order placed with a broker to buy or sell a stock when it reaches a certain price.
This is a great way to limit your losses on a stock that you’re holding because once the stop-loss price is reached, your broker will automatically sell the stock, limiting your loss.
This isn’t always guaranteed to happen though – as there are scenarios in which the stop-loss order cannot activate in time.
If you’d like to learn more about stop-loss orders, I’ve written the ultimate guide on stop loss orders here.
Position Sizing
This is a risk management technique that refers to the number of shares or contracts you take on in a trade.
Basically, it’s a way for you to control how much risk you’re taking on each trade, and it’s important because it helps to mitigate against large losses if the trade doesn’t go as expected.
It’s important to position size correctly so that you don’t risk too much on any one trade.
Have A Plan
Before you even start investing or trading stocks, make sure you have a plan in place. This plan should include your investment goals, risk tolerance and exit strategy.
By having a plan, you’ll be less likely to make impulsive decisions that can end up costing you money.
If you’re unsure of how to create one or what to include, you can check out my guide on that here.
Summary
No one has ever become a successful investor overnight. It takes time, patience and a lot of hard work to make it as a stock investor/trader.
The key to success in this field is loss prevention. By understanding what can go wrong and minimizing your risks, you’ll be better positioned to make consistent profits in the market.
If you can focus on loss prevention and follow these strategies, you’ll be well on your way to becoming a successful stock investor or trader.
Remember, profits should be a by-product of good risk management, not your sole focus. So keep that in mind as you begin your journey in the stock market.
Best of luck!
Terry
